1 Afonso Bevilaqua / Alexandre Schwartsman June 2004 Brazil: Recent Economic Developments

2 I. Economic Activity II. Inflation III. External Sector IV. Fiscal Policy and Debt Management V. Strengthening Resistance to Shocks

3 I. Economic Activity

4 GDP Growth Q032Q03 1Q04 % Seasonally Adjusted

5 GDP Growth 1Q04 vsLast 4 1Q032Q033Q034Q031Q04 1Q03quarters GDP-1.2%-0.9%0.5%1.4%1.6%2.7%0.0% Agriculture2.9%1.0%-4.6%5.6%3.3%6.4%4.0% Industry-2.7%-3.7%3.0%1.8%1.6%2.9%-1.0% Mineral %0.7% Manufacturing %1.2% Construction %-8.9% Utilities %0.3% Services-0.6%-0.1%0.2%0.8%0.4%1.2%0.1% Commerce %-1.4% Transport %1.8% Communication %-0.9% Government %0.7% Financial %0.8% Rents % Other %-1.0% Consumption-1.6%-1.2%0.5%1.5%0.3%1.2%-2.3% Government0.4%0.3%0.0%0.2%0.8%1.5%1.0% Investment-5.1%-7.1%3.2%4.0%2.3%2.2%-5.7% Exports-3.1%6.2%0.8%5.7%5.6%19.3%14.6% Imports3.1%-1.9%0.7%8.2%4.0%11.7%2.1% Seasonally adjusted

6 GDP After FX Crises 3.5% -0.2% -4.9% -6.2% -6.7% -7.4% -10.5% -10.8% -11.0% -13.3% Brazil (2004) Brazil (2003) Russia (1998) Mexico (1995) Korea (1998) Malaysia (1998) Thailand (1998) Uruguay (2002) Argentina (2002) Indonesia (1998) Source: IMF, Brazil 2004: Central Bank estimate

7 Real Retail Sales Seasonally Adjusted, 3-Month Moving Average Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Mar 04 Average 2003 = 100

8 Mar 2004 Mar Q2004 1Q2003 Total Furniture & Electronics Fuel and Lubricants Supermarket, Food, Beverage and Tobacco Vehicles & Autoparts Clothing Retail Sales %

9 Accumulated growth since June 2003, seasonally adjusted Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Supermarket Clothing Furniture & Electronics Vehicles & Autoparts %

10 Credit x Demand Source: Bacen Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr Credit to Individuals right scale R$ billion Retail Sales left scale 2003 = 100

11 Total Credit Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Jun 2003 = 100 Apr 04

12Source: Bacen Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Apr Lending Interest Rates Individuals left scale Corporates right scale %p.a.

13 Real Interest Rates (360-day swap) Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 % p.a. Avg 01/ % Avg 97/ % Avg % Avg % Avg % Source: Bacen

Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Jun 03 = 100 Industrial Sales x Industrial Output Industrial Output Industrial Sales Source: IBGE, CNI

Apr 03Jul 03Oct 03Jan 04Apr 04 Insufficient Excessive Balance Quarterly Industrial Survey: Level of Inventories % of Sample Source: FGV

16 Real Industrial Sales Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 s.a., Jun 2003 = 100 Source: CNI

17 Industrial Output s.a., Jun 2003 = Jun 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Jul 03 Source: IBGE

18 Industrial Output Source: IBGE Total Capital Goods Intermediate Goods Consumer Goods Durable Semi-Durable e Non-Durable % Mar 04 Mar 03 1Q04 1Q03

19Sources: IBGE, Bacen Industrial Output ( ) Jan 94 Apr 95 Jul 96 Oct 97 Jan 99 Apr 00 Jul 01 Oct 02 Mar 04 s.a., 2002 = 100

20 Formal Employment s.a., Jun 2003 = Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Source: Ministry of Labor and Employment

21 Industrial Employment s.a., Jun 2003 = ,5 100,0 100,5 101,0 101,5 Jun 03 Jul 03 Ago 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 São Paulo (Fiesp)Brazil (CNI)

22 Industrial Real Wages s.a., Jun 2003 = 100 Mar 04 / Jun 03 = 6.9% Mar 04 / Mar 03 = 8.8% Jun 03 Jul 03 Ago 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Source: CNI

23 Urban Average Real Earnings Source: IBGE Mar 2002 = Mar 02 Aug 02 Jan 03 Jun 03 Nov 03 Apr 04

24 Steel Output Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 s.a., Jun 2003 = 100 Source: IBS

25 Power Consumption: São Paulo Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 s.a., Jun 2003 = 100 Source: Eletrobrás

26 Packing Paper Shipments s.a., Jun 2003 = Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Source: ABPO

27 Business Confidence Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Future Conditions Current Conditions Net Expectations Source: FGV Industrial Survey

28 In a Nutshell Economic activity recovered since 3Q03, but: –Recovery is not symmetric and does not occur at the same pace in all sectors. –Sales outpaced production growth, affecting level of inventories. –Industrial output growth led by durable and capital goods. –Industrial employment and payroll have reacted since 4Q03. –Positive leading indicators for 2Q04.

29 II. Inflation

30 IPCA Inflation Rate IPCA-15IPCA % Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 May 04

31 Wholesale Industrial Prices IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 %

32 Wholesale Industrial Prices x Consumer Industrial Prices Wholesale industrial prices Retail Industrial prices % Jan 96 Jul 97 Jan 99 Jul 00 Jan 02 Jul 03 Apr 04

33 Commodities Prices Chicago Commodities Bureau (CRB) Price Index Jan 02 Aug 02 Mar 03 Oct = 100 Apr 04 Food Metals

34 Core Inflation IPCA: 3-Month Moving Average % Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Apr 04 Smoothed trimmed meansExclusionNon-Smoothed trimmed means

35 Tradable x Non-Tradable Inflation % Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Apr 04 TradablesNon-Tradables IPCA: 3-Month Moving Average

36 Inflation: (% of Items with Price Increases) % Apr Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04

37 Market Inflation Expectations: Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 % p.a. 6.5%

38 Quarterly Inflation Expectations: Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 % 1T20042T20043T20044T2004

39 Inflation Expectations: 12-Month % Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 May %

40 12-Month Inflation Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 % Apr % ActualMarket Expectation

41 III. External Sector

42 Current Account vs. Trade Balance -36, , , , ,000 -6, ,000 Jan 96 Dec 96 Nov 97 Oct 98 Sep 99 Aug 00 Jul 01 Jun 02 May 03 Apr 04 Current account -8,000 -4, ,000 8,000 12,000 16,000 20,000 24,000 28,000 Trade balance

43 Current Account Surplus: 1994/ % of GDP *2004: 12-month to April 2004* 1.1

44 Quarterly Trade Balance US$ billion Exports Imports

45 Exports and Imports Quantum 1996 = 100 Seasonally Adjusted Exports Imports

46 Export and Import Prices 1996 = Exports Imports

47 Exports US$ mn % % % Exports % % 2094% Primary % % 1287% Semimanufactures % 22541% 224% Manufactures % 2699% 592% US$ mn % % % Exports % % 2912% Primary % % 2336% Semimanufactures % % 985% Manufactures % %- 39-1% QuantititesPricesCross-effect Jan-Apr 2004 Jan-Dec 2003 QuantititesPricesCross-effect

48 Imports Substitution Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec Imported Quantum left scale Industrial Output right scale Dec 1995 = 100

49 Export Growth Remains Diversified Exports by Product Jan- Apr month USD millionShare Transport equipment %35% Metal %32% Soy %36% Meats %47% Mechanical 502 9%47% Chemicals 308 6%22% Wood223 4%37% Sugar 211 4%53% Shoes & Leather 167 3%19% Other648 12%9% Total %25% Product group Absolute change % change USD millionShare Transport equipment %24% Soy %28% Metal %25% Mechanical %44% Meats %38% Chemicals %25% Ore545 4%16% Paper & pump547 4%23% Textiles 475 3%37% Wood 435 3%23% Other %10% Total %21% Product group Absolute change % change Ore301 6%26%

50 Export Growth Remains Diversified Exports by Country Jan- Apr month USD millionShare Argentina90217%82% China3827%32% Netherlands3246%29% Italy2685%41% Germany2605%28% Venezuela2495%221% France1864%38% Spain1753%43% Mexico1603%21% South Korea1573%53% Other %16% Total %25% Market Absolute change % change USD millionShare Argentina %92% China %49% Netherlands1.1298%33% Germany6024%22% Italy5314%27% Korea4763%53% Spain4613%36% Mexico4313%17% Chile4073%25% United States4003% Other %18% Total %21% Market Absolute change % change

51 Foreign Direct Investment US$ billion * FDI Inflows Related to Privatizations *2004: BCB estimate

52 IV. Fiscal Policy and Debt Management

53 Consolidated Public Sector Primary Surplus % of GDP Apr Jul 94Feb 96Sep 97Apr 99Nov 00Jun 02Jan 04

54 Fiscal Result change I - NATIONAL TREASURY1.5%3.2%2.9%3.0%3.7%4.4%6.62%6.61%-0.01% Revenues15.1%16.6%16.4%17.5%18.6%18.3%20.42%20.91%0.49% Transfers3.0%3.5%3.7%3.8%4.2%4.0%4.52%4.32%-0.21% Net revenues12.1%13.2%12.8%13.6%14.5%14.3%15.90%16.60%0.70% Expenditures10.3%9.7%9.6%10.3%10.6%9.5%9.17%9.80%0.62% Payroll5.0%5.1% 5.4% 5.2%5.30%5.23%-0.07% Unemployment benefits0.5%0.6%0.5%0.6% 0.42%0.48%0.06% LOAS/RMV0.3%0.27%0.46%0.20% OCC4.8%4.0% 4.4%4.6%3.5%3.19%3.62%0.43% Subsidies0.3% 0.4%0.2%0.4%0.10%0.19%0.09% II - INSS-0.8%-1.0%-0.9%-1.1%-1.3%-1.7%-1.27%-1.65%-0.38% Revenues5.1%5.0%5.1%5.2%5.3% 4.95%5.34%0.39% Benefits5.9%6.0% 6.3%6.5%7.1%6.22%6.99%0.77% III - CENTRAL BANK0.0%-0.1%0.0%-0.1% 0.0%-0.04% 0.00% Central Government Primary Result0.7%2.2%1.9%1.8%2.4%2.6%5.31%4.92%-0.39% Memo: Total Revenues20.2%21.7%21.5%22.7%23.9%23.6%25.37%26.25%0.88% Transfers3.0%3.5%3.7%3.8%4.2%4.0%4.52%4.32%-0.21% Primary expenditures16.5%16.0%15.9%17.0%17.4%17.1%15.54%17.02%1.48% Jan-Apr

55 Fiscal Result *2004* change Nominal deficit 7.5%5.8%3.6% 4.6%5.2%4.0%1.7%-2.2% Primary deficit0.01%-3.19%-3.46%-3.64%-3.89%-4.37%-7.0%-6.4%0.6% Central Government-0.5%-2.3%-1.9%-1.8%-2.4%-2.6%-5.4%-5.0%0.4% Subnational governments0.2%-0.2%-0.5%-0.9%-0.8%-0.9%-1.3% 0.0% States0.3%-0.2%-0.4%-0.6% -0.8%-1.2% 0.0% Municipalities-0.1% -0.3%-0.2%-0.1% 0.0% Public companies0.4%-0.6%-1.1%-0.9%-0.7%-0.9%-0.3%-0.1%0.3% Federal0.2%-0.7%-0.9%-0.6%-0.5%-0.6%-0.1%0.2%0.3% Local0.1%0.0%-0.1%-0.3% 0.0% Nominal Interest on Debt7.5%9.0%7.1%7.2%8.5%9.6%11.0%8.1%-2.9% Jan-Apr

56 Public Sector Primary Surplus % of GDP Federal Government and BacenSub-national Governments State-Owned EnterprisesConsolidated Public Sector Dec 98 Aug 99 Apr 00 Dec 00 Aug 01 Apr 02 Dec 02 Aug 03 Apr 04

57 Debt-to-GDP Ratio Jan 91 Apr 92 Jul 93 Oct 94 Jan 96 Apr 97 Jul 98 Oct 99 Jan 01 Apr 02 Jul 03 % do PIB Apr % Jan 02 May 02 Sep 02 Jan 03 May 03 Set 03 Apr 04

58 Debt Dynamics Net debt increase7.4%-0.2%3.2%2.8%3.2%-2.1% 1. Primary surplus-3.0%-3.3%-3.5%-3.3%-4.3%-2.0% 2. Pure interest on the debt8.4%6.8%6.9%7.2%9.3%2.5% 3. Depreciation on domestic debt3.8%0.8%1.5%4.8%-1.5%0.1% 4. Depreciation on foreign debt4.2%0.8%1.5%4.4%-1.6%0.2% 5. Skeletons0.0%0.8%1.5%0.9%0.0% 6. Privatization proceeds-0.9%-1.8%-0.1%-0.2%0.0% 7. Effect of GDP growth-5.2%-4.3%-4.6%-11.0%1.2%-2.9% Memo: Debt dynamics (1+2+7)0.2%-0.8%-1.2%-7.1%6.3%-2.4% Currency (3+4)8.0%1.6%3.0%9.3%-3.1%0.3% Net "skeletons" (5-6)-0.9%-1.0%1.4%0.7%0.0%

59 FX-Linked Debt Rollover Rate 0% - 0% - 0% - 0% Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 % 0% - May 04

60 USD Debt - % of debt % Jan 97 Mar 98 May 99 Jul 00 Sep 01 Nov 02 Apr 04 Total USD-linked debt vs total net debt Domestic USD-linked debt vs. domestic debt

61 USD Linked Public Debt Apr/ Jan 97 Sep 98 May 00 Jan 02 Sep 03 US$ billion

62 V. Strengthening Resistance to Shocks

63 Net International Reserves Net Reserves Adjusted Net Reserves US$ billion Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04

64 External Debt Ratios *2004: BCB estimate * Interest payments/exports (%) Net external debt/exports Net external debt/GDP (%)

65 Interest Payments/Exports Ratio % * *2004: BCB estimate

* Net External Debt/Exports Ratio % *2004: BCB estimate

67 Net External Debt/GDP Ratio % 2004* *2004: BCB estimate

68 Impact of a 1% FX change on Debt/GDP ratio 0,17 0,19 0,21 0,23 0,25 0,27 0,29 0,31 0,33 0,35 Jan 00 Sep 00 May 01 Jan 02 Sep 02 May 03 Apr 04 %

69 Afonso Bevilaqua / Alexandre Schwartsman June 2004 Brazil: Recent Economic Developments